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Italian PM Renzi resigns after losing referendum vote – AM Briefing

Early moves

- Investors shrug off Italian referendum result - Equities soar while precious metals slump Prime Minister Matteo Renzi lost his referendum on constitutional reform. The news led to a sharp mark-down in European stock index futures ahead of the open and a pull-back in the euro. Meanwhile, US stock index futures rallied in early trade. Matteo Renzi had previously said he would resign if voters turned down his proposals for reform. This could be highly destabilising for the Italian economy as it comes just as a number of troubled banks are preparing to tap investors for additional capital. It should be remembered that Italy’s banking system is weighed down by hundreds of billions of non-performing loans. But equities soared back into positive territory soon after the open. Even the Italian FTSE/MIB swung from being down over 4% in pre-market trade to up over 1% within a few hours of trading. This “risk-on” move saw investors pile out of gold and silver which were both down over 1% at the time of writing. The sudden bounce-back in equities suggests that investors are shrugging off the implications of the referendum result. This could be a mistake as Italian banks may struggle to raise much-needed capital with such political uncertainty.

Stock Index Update

- Investors shrug off Italian referendum result - US Payrolls keep Fed rate hike in prospect At the end of last week there were signs that investors were becoming wary of pushing stock indices much higher. European indices ended lower on Friday as investors fretted about the US non-farm payroll release and Sunday’s Italian referendum. Italian Prime Minister Matteo Renzi resigned after it became apparent he had lost his referendum on constitutional reform. European equities were marked down sharply in early trade. However, these moves were quickly reversed and it wasn’t long before all the major European and US indices were trading back in positive territory. This “risk-on” rally is encouraging. But it’s worth bearing in mind that the Italian banking sector will find it more difficult to raise much-needed capital due to increased political uncertainty. November’s Non-Farm Payroll number came in at 178,000. This was a shade below the consensus forecast of 180,000 so pretty much as expected although October’s number was revised down to 142,000 from 161,000. The Unemployment Rate fell to 4.6% - it lowest level since the end of 2007 - and well below the 4.9% rate anticipated, so yet another good reason for the Fed to raise rates on 14th December. However, the fall in unemployment comes as the participation rate slumped, meaning that an increasing number of Americans have given up looking for work so are no longer counted as being unemployed. In addition, Average Hourly Earnings fell 0.1% month-on-month, well below the +0.2% expected and last month’s +0.4%. This is bad news for employees as it suggests that wages are being squeezed even as inflation is picking up.

Commodities Update

- Brent and WTI close out at highest since summer 2015 - Precious metals steady as the dollar rally runs out of steam In early trade on Friday Brent and WTI crude pulled back from the multi-month highs hit on Thursday. However, both contracts subsequently rallied and ended up posting their highest closes since the summer of 2015. Despite this there’s a feeling that the OPEC/non-OPEC production cut agreement from Wednesday may not be as positive for oil as it first seemed. After the initial euphoria passed, analysts began to express concern over Russia’s commitment to cut production by 300,000 barrels per day (bpd). There were also doubts over Mexico’s willingness to curb production. This suggested that the 600,000 bpd non-OPEC cut could be hard to achieve. This is aside from the fact that historically OPEC compliance with previous quota agreements has been around 60%. This would suggest that the 1.2 million bpd cut could come in nearer 700,000. This is on top of the fact that OPEC published a list of production levels which indicated a substantial cut from Iran, rather than the freeze promised. All-in-all, things may not be that bullish for oil from here on in. In addition, the current rally should help to embolden US shale oil producers who will be anxious to boost output to take advantage of the current price spike. At the end of last week gold finally found some support after falling relentlessly since Donald Trump clinched victory in the US presidential election. Since the early hours of 9th November gold has fallen 13%, smashing below a number of significant support levels. In fact, it’s difficult to pin-point the next significant level of support, even though the metal is looking extremely oversold at current levels. Investors have rushed to dump gold as the dollar continues to rally on the prospect of raised inflation expectations in the US. Of course, the dollar looks overbought as much as gold (and silver) appear oversold. So the dollar really needs to pull back from current levels for the two precious metals to have any chance of a half-decent recovery.

Forex Update

- Dollar lower after Non-Farm Payrolls - US dollar drifts ahead of payroll data The US dollar lost ground over the course of last week as investors booked profits following the post-election surge. There was plenty of volatility in most currency pairs which only calmed down ahead of Friday’s US Non-Farm Payroll release. Concerns have grown recently that the Fed may be getting behind the curve when it comes to monetary tightening. The latest readings on US GDP and Manufacturing surprised to the upside. Add in the additional stimulus of Trump’s proposed tax cuts and infrastructure spending and it’s easy to see how inflation could soar past the Fed’s 2% target. If that were to happen then the pressure would be on the US central bank to raise rates further and faster than is currently being priced in. This could see bond yields shoot higher which would be good news for the dollar but very bad news for equities. Earlier in the week the Fed released its latest Beige Book. Seven regional Fed districts reported that economic activity was growing at a modest or moderate pace, down from eleven in the last report. This month’s report was notable for the frequency with which headwinds caused by dollar strength was cited as a reason for economic weakness. This could be a concern going forward, particularly if the dollar continues to push higher if the Fed feels forced to tighten monetary policy further. But Friday’s payroll data (particularly on Average Hourly Earnings) should help allay fears of runaway inflation.

Upcoming events

Today’s key economic data releases and events include Chinese Caixin Services PMI and Japanese Consumer Confidence. We also have Spanish, Italian, French, German, Euro zone and UK Services PMIs, Euro zone Retail Sales, Sentix Investor Confidence and Eurogroup meetings. From the US we have the ISM Non-Manufacturing PMI and Labor Market Conditions Index. Later on, FOMC-voting member James Bullard speaks.

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